Applying for Small Business Loans

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Tim Walker: Hello everyone, this is Tim Walker. I’m an editor with Hoover’s and we are joined once again by Katy Ford, our small-business expert. Hello Katy.

Katy Ford: Hello Tim.

Walker: Great! Today we’re talking about applying for a business loan. Small-business owners are no strangers to cash-flow crunches and sometimes a line of credit comes in handy for making payroll when your accounts receivable are lagging or something like that. But when you’re looking at a big line out in purchase, like a piece of equipment, you just have to have, sometimes a bank loan seems to be the best bet. So Katy, before a small-business owner fills out that loan application, what should he or she be considering?

Ford: Well, Tim, it may seem obvious but the first thing you need to do is take a serious look at your ability to repay that loan. The thing is, if you’re operating in a marginal level, a loan will give you more working capital but it’s also going to increase your debt and a bigger operation means increased overhead and that’s also going to come out of your profit.

Walker: Well, so Katy, where can a small-business owner go to borrow money?

Ford: Well most experts advise that you start where you’re already a known factor and that would mean the bank that handles your personal or business accounts. They know your history and if you’ve demonstrated financial responsibility, they’re more likely to grant you a loan.

Walker: OK, but suppose someone for whatever reasons doesn’t want to use their own bank or they haven’t had success then where else can they go?

Ford: Well, there are three places they can go. First, they can go to a small credit union. The reason I recommend this is because usually at a small credit union, you have high-level decision makers who are more easily accessible. If you’re good at selling your ideas and you have a solid documented business plan, this might be your best bet. Secondly, you can scan local newspapers and magazines for the financial institutions who are actually advertising for new business. They’re looking for business and so you automatically have what they want. And of course, in this day and age, you can shop at the internet. There are several sites out there in the business of matching borrowers with lenders and it’s all for free. Basically, the lenders are being paid a fee for the referral. When you have multiple lenders vying for your business, they’re motivated to give you the most favorable terms and lowest interest rates to win you over. And obviously, that’s to your advantage.

Walker: Well, that makes sense. But before you approach a lender, if you’re the business owner, what sort of preparation should you make?

Ford: Well, first and foremost, Tim, you need a business plan that explains what you’re going to do with the borrowed money and how those purchases are going to increase your bottom line. After all, this is an investment and the bank wants to know what kind of return they’re going to get.

Walker: OK, so what else needs to be in that plan?

Ford: Well paint the clearest picture possible. Include professional bios of yourself and your partners, if you have any partners in business, your track record, your strategies, who your competition is, and this is very important Tim, what advantages you have over your competition.

Walker: OK, so that’s good high-level stuff but what about numbers? Are there numbers that the lenders are going to want to see?

Ford: Yes and I’d include the following. First, at least two or three tax returns. Also you’re going to need a year-end profit-and-loss statement, or if you’re in the middle of a fiscal year, a stub that reflects your business’ performance in the last quarter, and then lastly, I’d also include a performance statement that projects what your company will be worth in the coming years.

Walker: OK. Well what about those entrepreneurs who have great business ideas but maybe they’re not too savvy about the number crunching?

Ford: Well, you might not realize it, Tim, but you’re already paying for some assistance. So you might as well use it. The Small Business Administration has small business-development centers all over the country that can help you get your loan documents in order. And the great thing is that the SBA can also act as your rich uncle, so to speak. Depending on the amount you’re wanting to borrow, the SBA can play the role of a guarantor. With the SBA stepping up to the plate on your behalf, the risk is mitigated and a bank is more likely to invest in your business.

Walker: The way you describe it, you make it sound almost easy.

Ford: Well, it doesn’t have to be the hardest thing you do. Just leverage the resources in front of you. Remember, banks are in the business of making a return on their investments so the better you can demonstrate your ability to repay that loan with interest, the better your chances of securing that capital and taking your business to the next level.

Walker: Well, this is great stuff, Katy. Thanks for being with us.

Thanks for listening to Small Business Focus with Hoover’s editor Tim Walker and small-business specialist Katy Ford.